Calgary-area developer comes up with plan for making first-time home ownership more affordable

Derek Sankey
Sun

When 25-year-old hair stylist Nicole Estrada and her 22-year-old boyfriend Tayo Diening-Verge went looking around Calgary for an apartment to rent, they were shocked that monthly rental rates were almost comparable to the cost of a mortgage.

“It’s too expensive,” says Estrada, whose partner is a heavy-duty mechanic. “You might as well invest and get in the game.”

Although the couple had well-paying, stable jobs, the problem was coming up with the down payment to buy their first home together. “It’s not easy at all [to get into home ownership],” she says.

In Calgary, where real estate prices have skyrocketed, leading the country in appreciation over the past two years, the couple thought they were destined to rent. Then they found a developer who is at the leading edge of a new trend in mortgage solutions for first-time home buyers.

“One of the challenges that developers and the industry as a whole faced was how to create an affordability type of response [to escalating home prices],” says Annette Hodgins, assistant marketing manager for Pointe of View Developments, which builds and sells condominiums and townhomes around Calgary.

“Most of our buyers have really good, solid incomes but a lot of us are down-payment poor,” she explains. “They have everything to get them qualified, they just don’t have that $20,000 or $30,000 in the bank that’s required as a down payment.”

So, Pointe of View approached the BMO Financial Group and devised a plan in conjunction with the Canada Mortgage and Housing Corp. under its Flex 100 program, which helps qualified buyers get approval for 100 per cent of the cost of their mortgage.

But instead of facing very high premiums usually associated with 100 per cent financing, Pointe of View stepped in by providing $20,000 to buyers, who must then invest that money into an RRSP with BMO. After 90 days, that money goes right back to Pointe of View as a down payment, making the final interest rates on the mortgage affordable.

“They’re immediately building their equity and their future retirement plans,” says Hodgins.

The program was launched in January and is thought to be the first of its kind in Canada. So far, the response has been very strong.

“Some of my friends are looking into it now, too,” says Estrada.

The federal government’s First Time Home Buyer program allows buyers to invest up to $20,000 in RRSPs and withdraw it — penalty-free and tax-free — for use as a down payment.

The money used can be paid back into the RRSP over a long period of time without any initial payments, freeing up the money for a sizable down payment.

Many potential first-time home buyers don’t fully understand the new range of options available to them to get into the market instead of renting.

“There’s lots of first-time home buyers sitting on the fence trying to figure out whether they can really enter into home ownership,” says Laura Parsons, area manager of business development in Calgary for BMO.

“We’re treading on new ground and so far . . . we’ve seen a lot of people that couldn’t get into home ownership now get into it, so hopefully it will evolve to something that everybody can offer,” Parsons says.

Banks and mortgage lenders have also changed the lending rules in other ways that address the lack of affordability for first-time home buyers across Canada.

Amortization periods — the length of time in which a mortgage is paid back — have gone from a maximum of 25 years to the current limit of 40 years in just the past two years.

While it means paying substantially more interest if paid out over the full 40 years, most buyers simply want affordable payments in their younger years and will then pay lump sum or double-up payments when they can afford it later in their careers.

Banks will also work with first-time home buyers to rewrite outside debt with smaller monthly payments, allowing them to get approved for larger mortgages that allow them entry into home ownership.

Buyers can also get RRSP top-up loans to take full advantage of the First Time Home Buyers program.

There are also rent-to-own options in the market, where a building owner will permit a tenant to pay monthly rent with a portion being saved up as an eventual down payment.

“The problem there is you’re not reaping the financial investment opportunity that money could give you if you had funnelled it through an RRSP program,” Hodgins says.

Parsons advises desperate parents to seek out these new options and consult with financial advisers because there are many new options available.

“One of the issues is parents who have children they can’t get out of the house,” says Parsons, with a chuckle. “We can help them get there.”

© The Vancouver Sun 2008

 

Art Cowie says he’s ‘no threat’ to neighbourhood

Cheryl Rossi
Van. Courier

Instead of mass rezoning to allow density in Vancouver neighbourhoods where there’s great opposition, the city should focus on fee-simple rowhousing in areas that want it, says Art Cowie.

The former city councillor, parks board commissioner, PNE director, Liberal MLA and ongoing planning consultant expects to break ground on such a project in a month.

His demonstration project and future home will be three, three-storey rowhouses on his larger than normal 80-by-125 foot lot at Cambie and 33rd, with a 480-foot suite built over each of three double garages.

Each will have a 13-by-22 foot front garden, a 20-by-22 foot back garden, a roof garden, decks and solar panels.

Cowie moved across from Queen Elizabeth Park two years ago. He recognized with the Canada Line coming, the thoroughfare with old single-family homes on large lots was ripe for change. With Cowie Rowhouse, a division of his Eikos Planning Inc., and Mike Amiri from West Vancouver‘s MYK Construction Ltd., he’s developing rowhouses that he hopes will catch on along Cambie from 26th to 37th avenues, and perhaps as far as 39th. “This city’s at a time of change again the way it was in the ’70s, and we’ve got an opportunity here to do some wonderful things,” Cowie said. “What I’m saying is let’s get on with it.”

Only one neighbour raised concern about his project, he says, and no opposition was expressed at last March’s public hearing. It helps that investors own 70 per cent of the homes near his property on Cambie, but Cowie said the people in the homes to the west didn’t feel threatened by the development.

“They realize something’s going to happen along Cambie Street,” Cowie said. “I’m no threat. I’m building, essentially, the equivalent to single-family houses only they’re attached.”

Cowie is having the lane behind his lot improved with lighting and said B.C. Hydro has coordinated the laying of all service lines underground.

Instead of his rowhouses being strata titled, Cowie wanted them to be fee-simple housing, with the only agreement between neighbours on their shared wall. Because the city’s legal department was worried that the province doesn’t have legislation to cover shared walls, they will be one inch apart on this project. But Mayor Sam Sullivan asked the provincial government to bring in a new shared wall agreement and this will be hashed out in the spring legislature, Cowie said.

He expects his 3,000-square-foot rowhouses to be listed at $1.6 million, but says in the future he could design narrow 2,000 square foot rowhouses that could sell for $1.1 million.

But what about people who worry rezoning will boost their property taxes, making their homes unaffordable to retain?

“Those people are going to have to move anyway,” he said.

And what about the people who don’t want to demolish their homes to build rowhouses, and who don’t want to be overshadowed by neighbours that do?

“That’s life,” Cowie said.

“We are the most unusual city in the world. We live in suburbia. And it’s going to change whether they like it or not.”

NPA Coun. Suzanne Anton lauds Cowie for making fee-simple rowhousing a reality in Vancouver.

“He could have folded his tent two years ago and said, ‘This is way too much trouble, I’m just going to do a strata,’ but he didn’t,” Anton said. “That perseverance has led to us doing what we should have been doing anyway, which is getting the province to change the rules and getting this form of housing.”

She said the project fits well with the city’s EcoDensity initiative, especially because it adds density along an arterial, and contributes to affordability with the three suites.

© Vancouver Courier 2008

Derek Sankey
Province

Sixty-four per cent of Canadian adults own their home, but that number could drop because significantly fewer people intend to buy a home in the next two years due to the lack of affordability, according to new research by RBC Financial Group.

Overall intentions to buy a home in the next two years have dropped by five per cent to 23 per cent of adult Canadians. Those who say they are “very likely” to buy have slipped from nine per cent in 2007 to seven per cent this year, the lowest level in 15 years.

“This year’s results definitely signal a change,” says Catherine Adams, vice-president of home-equity financing for RBC.

For first-time homebuyers, much of the hesitation is due to lack of knowledge about their options and a sense that it’s a confusing, daunting task.

© The Vancouver Province 2008

There’s a lot to learn before you make a move. Here are some tips

Derek Sankey
Sun

Sixty-four per cent of Canadian adults own their home, but that number could drop because significantly fewer people intend to buy a home in the next two years due to the lack of affordability, according to new research from RBC Financial Group.

Overall intentions to buy a home in the next two years have dropped by five per cent to 23 per cent of adult Canadians, says the report. Those who say they are “very likely” to buy have slipped from nine per cent in 2007 to seven per cent this year, the lowest level in 15 years.

“Considering the flurry of activity we’ve seen over the last few years, this year’s results definitely signal a change,” says Catherine Adams, vice-president of home equity financing for RBC.

For first-time home buyers, much of the hesitation is due to lack of knowledge about their options and a sense that it’s a confusing, daunting task. Mortgage experts say it also signals a need for young adult Canadians to get a lesson in Mortgage 101.

“A lot has changed in the boring world of mortgages in the last two years that has helped people deal with the affordability issue as prices have gone up,” says Adams.

Housing markets may rise and fall, but one thing has always been true: building home equity pays off in the long run. “If I’m renting an apartment, that’s just money going out the window every month and you have no equity at the end of the day,” says Adams.

It all starts with the basics. Don Peard, a vice-president of RBC’s mortgage specialists, says potential first-time buyers need to get their credit report from Equifax Canada or TransUnion so they know where they stand.

“Try and get realistic about how much you can afford to pay for that home,” says Peard. The rule of thumb is that your mortgage and utilities costs should amount to no more than 32 per cent of your income, known as gross debt service ratio.

The total debt ratio, which includes all outside debt, should be no more than 40 per cent.

“Once you get up into that 40 per cent range, you’re curtailing your ability to have other funds available,” he says.

Next, see a mortgage specialist and get approved for a mortgage so you know exactly how much money you have to work with before looking around.

“People might have the perception that they can’t qualify for a mortgage but it’s a conclusion they jump to too quickly,” Peard says.

Interest rates are important, but remember to include other factors in your considerations, including flexibility of the terms and the type of mortgage: variable rate, fixed rate or a combination of both.

Take advantage of the change in the past two years among major lenders to switch from a 25-year limit on the length of the mortgage, or amortization, up to 40 years.

If you select a longer term, it will allow you to have lower payments up front and then, ideally, increase those payments as you progress in your career. If you don’t, the costs can be staggering.

For example, on a $150,000 mortgage paid out over 25 years, you would pay $140,000 in interest alone, but that goes up to $249,000 for a 40-year amortization. However, the 40-year term will reduce monthly payments from $979 down to $839 minimum.

About 60 per cent of RBC customers currently opt for the 40-year mortgage, Adams adds, but the majority plan to increase payments when they are able.

“It’s more of a strategy,” she says. “They’re young in their careers [and] they’re really more concerned about managing the payment while they’re young in their careers.”

Don’t forget to include closing costs in your calculations, which include legal and real estate agent fees, home inspections, property taxes, moving costs, utilities and possibly condo fees.

Shop around and see who offers a solution that makes the most sense for you. While buying a first home may seem overwhelming at the outset, just remember to do your research and take advantage of the new options available on the market.

“The important thing is that there’s a lot more flexibility,” Adams says.

© The Vancouver Sun 2008

 

Moves apply to rental properties with maximum of four units

Keith Woolhouse
Sun

Budding real estate moguls will welcome the news that Canada Mortgage and Housing Corp. (CMHC) has relaxed the rules for would-be Donald Trumps to purchase investment properties with no money down.

The changes apply to rental properties with a maximum of four units, but even The Donald had to start somewhere. CMHC has made the changes with the intention of easing the squeeze in the rental housing market. As long as a prospective purchaser can satisfy a lending institution, typically a bank, to approve the mortgage, CMHC will underwrite it up to 100 per cent. The Crown corporation will even tack the one-time insurance premium on to the mortgage.

As with any mortgage application, borrowers must be able to show the financial institution they have a sterling credit history, which would include a well-paid job, sufficient collateral and financial savings. If they can do that, CMHC will do the rest. And not just for one property, but two or three or more.

Under the Bank Act, all individual homebuyers who have less than 20 per cent of a property’s purchase price and borrow the 80-per-cent balance, require mortgage insurance to guarantee the loan in the event of default.

For rental properties up to four units, mortgage insurance is required for buyers borrowing 65 per cent of the cost of the property, but it can go as high as 100 per cent.

A tight rental market in some regions prompted the CMHC to make two key changes to the existing program. First, it extended the amount of insurance coverage it would underwrite and then it reduced the cost of the insurance. Previously, CMHC had capped insuring mortgages at 85 per cent of the loan-to-value ratio.

“We wanted to make the program more attractive for consumers, recognizing that we do have markets out there where anything we could do to ease the housing situation would be a plus,” said CMHC president and chief executive officer Karen Kinsley.

The new insurance premiums range from 1.25 per cent to 7.25 per cent and mean substantial savings for investors.

At the 65-per-cent level the premium was lowered to 1.25 per cent from 1.75 per cent. At the 85-per-cent level it was reduced to 3.5 per cent from 4.5 per cent.

On a $1 million property where the purchaser has a down payment of $350,000, the 65-per-cent loan-to-value ratio how requires a mortgage premium of $8,125, instead of $11,375, a saving of $3,250.

On a property of the same value where the buyer has a down payment of $150,000 the 85-per-cent loan-to-value ratio requires a mortgage premium of $29,750 instead of $38,250, a saving of $8,500.

The premiums on the loan-to-value ratios above 85 per cent are: up to and including 90 per cent (4.75 per cent), between 90 and 95 per cent (6.5 per cent) and between 90 and 100 per cent (7.25 per cent).

“Our support for Canadians being able to invest in single or multiple rental projects has been there for a long time,” said Kinsley, “but we believe the changes we’ve made will make it even that much more attractive for them to enter the residential rental market.

“As long as the borrower has the necessary collateral to meet a financial institution’s lending requirements, we’ll guarantee that if that homeowner defaults then we’ll reimburse the bank for the full amount of the outstanding loan.”

It’s early days for the changes, Kinsley said, but the greatest feedback has come from Quebec. She attributed that to the style of rental housing in the province which lends itself to duplexes and triplexes. “You see many people in Quebec who are investors in these small rental type accommodations. Over all, we’ve seen a significant increase in the demand since the changes were made and that suggests that they have been helpful.”

Kinsley is convinced the move to more relaxed lending will not lead to the reckless borrowing that has plunged the U.S. housing market into crisis.

“Canadian banks and insurers have exercised prudence with the qualifying standards and ensured that they haven’t assisted people to purchase a home they cannot afford. We’ve been a bit more conservative in this marketplace,” she said.

“We’re very pleased with this program. Anything we can do to help rental markets in a prudent way is a good thing.”

In 2006, the last year for which figures are available, CMHC issued insurance coverage for 631,191 properties for a total of $291.4 million in premiums. While the corporation has about 70 per cent of the national mortgage insurance market it is the sole insurer of rental properties.

Forty per cent of the mortgage insurance market comes from eastern Canada, including Quebec, about 24 per cent from Ontario and 36 per cent from Manitoba westward.

© The Vancouver Sun 2008

 

Broker says he can beat the rates offered by the banks because his industry is driven by a smaller profit margin

Keith Woolhouse
Sun

Times have changed since mortgage brokers were the last port of call for homebuyers who had been turned away by their banks for poor credit history.

That happened often 30 years ago when the mortgage brokerage industry was just getting to its feet.

Banks were happy to do business with people who had a decent down payment, a steady job and who could pay the mortgage and the other costs associated with owning a home. That was an era when traipsing around the banks for a lower rate was the norm and getting a quarter of a percentage point shaved off the posted rate was only achieved with something akin to begging. The posted rate still exists, but these days banks will lower it at the mere hint that the client will walk.

The banks still retain the upper hand where mortgages are concerned because everyone relies on them for their daily financial affairs. But the mortgage brokerage business is no longer Plan B. It’s booming as a one-stop shop with super-competitive rates that banks find hard to match.

Frank Napolitano, managing partner of MortgageBrokers.com in Ottawa, accepts that the client base give the banks an edge. “The majority of their clients are in their database, so they have the first opportunity and typically most consumers feel like the bank is where they should go.

“But if there’s one thing that every consumer should be shopping around for, it’s a mortgage. If a bank tells the customer not to go and see someone else because there’s probably nothing better out there, well, that’s the first sign that you should go and see someone else.

“What a lot of consumers don’t realize is that we have access to more than 40 lenders. We know every product that every bank has. Eighty per cent of our business is done with six lenders, and we don’t shop a mortgage application around. Our best offer means just that and I don’t want to know what the other guy is offering.”

On this day, Napolitano’s firm is offering 5.69 per cent for a five-year closed term for A-rated clients, who represent 80 per cent of first-mortgage. The posted rate among the major banks is 7.45 per cent.

Napolitano, who worked for 21 years in the mortgage department at TD Canada Trust, says he can beat rates offered by the banks because the brokerage industry isn’t driven by the same profit margin.

“Our margins are much smaller. The fact is we’re working with the banks, so we’re just an alternate channel of supplying funds to homebuyers. They pay us only if we put a mortgage on their books and our commission doesn’t change whether we place the mortgage at 5.69 per cent or 6.79 per cent. We’re compensated only if we actually give them business. From the banking standpoint that’s a positive because, as opposed to staff sitting in their branches not doing any business, with the mortgage broker they’re paying only when they get the business.

“We want the customer’s return business, so we’re after the best rate with the best features. The winner in all of this has to be the homebuyer, because why would anyone pay more than they have to for the biggest investment of their life?”

Napolitano offers this advice to mortgage hunters. “A clean credit history is your number one priority. As far as lenders are concerned that’s what matters most. It used to be job history, but no more. Today, credit is the first thing lenders look at because as far as they’re concerned it determines whether they even want to deal with you and it determines the interest rate. The greater the risk, the higher the rate.”

Napolitano says those under 35 are more accepting of mortgage brokers than older generations, who will first head to a bank.

“That doesn’t bother me. I’m old fashioned and I believe in the services that I provide. I encourage all customers to see their bank first and get their best rate. Then come and see me and I’ll give you my best rate. But do me one favour. I won’t ask you what the bank offered you, so don’t tell the bank what I offered. When they tell you ‘this is our best rate’, well it should be that and it shouldn’t depend on what a mortgage broker has offered.

“It’s great to go to your bank and to be loyal to your bank, but make sure you hold your bank accountable for making sure that they’re giving you the best possible mortgage from the standpoint of interest rate and features.”

© The Vancouver Sun 2008

 

Some could fall to 5% over the next year, experts say

Keith Woolhouse
Sun

Canada‘s mortgage rates are heading down. At a time when stock markets are volatile and with the economy and income growth slowing, the positive news for those planning to get into the housing market or whose loans are up for renewal is that it’s going to cost less to finance a mortgage.

Economists, who are on top of the eddies that influence the borrowing and lending of money, and mortgage brokers, who tap funds for buyers, all agree that in the months ahead it’s going to be cheaper to borrow. What they don’t agree on is where rates will bottom out.

All the forecasts point to the Bank of Canada reducing its key overnight lending rate currently at 3.5 per cent. Chartered banks use the rate as a guide for their own prime rate that, in turn, dictates the cost of borrowing to consumers.

The 12-month outlook for the central bank’s overnight lending rate suggests it will flatten out between 2.5 per cent and three per cent.

If the banks follow the Bank of Canada down with its rate-cutting policy, consumers could see the posted five-year fixed rate, currently at 7.29 per cent, drop to about 6.3 per cent, and mortgage brokers offer around five per cent. Variable rates would be under five per cent.

Consumers should not be misled by the posted rate. While it was at 7.29 per cent, banks were readily offering 5.9 per cent to their customers.

Current rates are higher than they should be, said Daniel Martel, president of G. R. Gauthier Financial Services Inc. In mid-March, his Ottawa-based company’s five-year rate was 5.39 per cent, but Martel felt that it should be around 4.6 per cent, based on the government bond market prior to the collapse in the subprime mortgage industry when banks sought a 1.2-point cushion. He blamed the high rate on banks’ desire to recover their losses in the subprime market and to appease shareholders.

“The banks claim the rates are higher than they should be because their cost of borrowing is higher, which I don’t agree with. I think it’s more the banks recouping their losses,” he said.

Every percentage point makes a difference. One percentage point on a $100,000 mortgage with a five-year term, amortized over 25 years, costs $62 more per month ($744 a year).

A homeowner with a $250,000 mortgage with a rate of six per cent pays $155 more a month ($1,860 a year) than his neighbour who has a rate of five per cent.

Many factors influence the course of rates and not all of them are homegrown. One of the biggest influences lies south of the border with the powerful Federal Reserve Board, which dictates the direction of U.S. interest rates.

The U.S. economy, left reeling by subprime mortgage defaults, tightening credit and a falling dollar, is getting bleaker. It is seeking to revitalize its economy and ward off the effects of a recession by continuing to cut rates. Because of the spillover effect from a weaker U.S economy, the Bank of Canada has little choice but to stay in step with U.S. monetary policy.

CIBC’s Jeff Rubin believes the bank will gradually reduce its rate to three per cent as it follows the U.S. Federal Reserve downward. “While the Bank of Canada may not match the Federal Reserve Board basis-point for basis-point, it will, nevertheless, be following the Fed in direction,” he said.

David Rosenberg at Merrill Lynch in New York forecasts that the Fed needs to get its Fed Fund rate down to one per cent.

“This may sound aggressive but Fed easing cycles in recessions almost always see the prior tightening cycle completely unwind. The serious nature of the current housing deflation and credit crunch environment makes the case for an aggressive easing in policy all the more compelling,” he said.

The Bank of Canada’s next opportunity to adjust its overnight lending rate is on April 22. On April 30, the Federal Reserve Board has the opportunity to do the same. Those are two dates to watch.

© The Vancouver Sun 2008

 

Helen Morris
Sun

OTTAWA — Canadian sales of existing homes were down 5.6 per cent to 38,365 units in February compared with a month earlier, the Canadian Real Estate Association said Tuesday.

“Overall, the report highlights the moderating pace of housing activity in Canada, which will bring the level of activity to more sustainable levels,” said Millan Mulraine, economics strategist at TD Securities. “At the same time, the Canadian housing sector remains in much better shape than its U.S. counterpart.”

The CREA report said more than half of the seasonally adjusted monthly decline was the result of fewer sales in Toronto.

“The buying activity peaked in Toronto in December, before Toronto‘s land-transfer tax went into effect, and before the record-breaking winter storm activity,” said CREA president Ann Bosley. “The culminating effect is that 53 per cent of the national month-to-month decline in sales in February is represented by the decline in sales in Toronto.”

The industry report said that, on average, 18 per cent of national monthly resale residential activity is generated in the Toronto area.

Month-over-month sales also eased in British Columbia and Alberta.

However, the report said resale housing activity for February was at the second highest monthly level ever in Saskatchewan and at its third highest level in Prince Edward Island.

Total sales for January and February in Saskatchewan and Newfoundland and Labrador have never been as high, CREA said.

The report said seasonally adjusted residential new listings fell 2.8 per cent in February compared with January’s record — but were still at the second highest level on record.

The national residential average price climbed 6.2 per cent year-over-year to $313,065 in February 2008. The increase was the smallest year-over-year price rise since November 2004.

“Market balance for resale housing is evolving differently among provinces,” said CREA chief economist Gregory Klump.

The average price climbed to its highest level on record in British Columbia and Saskatchewan.

© The Vancouver Sun 2008

 

But only those who can absorb payment hikes should go for variable rate

Keith Woolhouse
Province

Nearly every decision when buying a new home hinges on money. The price of the property, the regularity of the payment, the mortgage term and the amortization period are all decisions dictated by money and being able to pay the mortgage on time.

There is one decision, however, that is influenced primarily by emotion and the tolerance for risk.

It’s the choice between a fixed rate and a variable rate.

In the fixed-rate camp are the security seekers, those who seek comfort in the knowledge that their repayment will be the same, month in and month out, regardless of the terms of the mortgage.

In the variable-rate camp are those who are prepared to gamble, never knowing from one payment to the next — although that paints it in its darkest terms — how much the next payment will be.

While money plays a part in making this decision, the greatest motivator is the risk factor. It’s the ultimate gamble and it’s not for everyone, which is why an estimated 70 per cent of Canadians opt for the fixed-rate mortgage ,believing that not only will they sleep better at nights, but that they are making the soundest decision in this, the biggest investment of their life, and it is the safest and most financially prudent course to follow.

They are wrong. Not all of the time, because interest rates have fluctuated widely in the past, but they’re wrong nearly 85 to 90 per cent of the time. That makes their decision to opt for the more conservative fixed-rate option the wrong choice.

“A lot of Canadians like the psychology and the security that comes from a fixed-rate mortgage that is predictable and constant for the next five to 10 years,” says Moshe Milevsky, associate professor of finance at the Schulich School of Business at York University, Toronto, who has studied the fixed-rate versus variable-rate conundrum extensively.

“They like the comfort of knowing exactly what their salary is, exactly what their expenses are, exactly what their mortgage is. For those people, the fixed rate is the way to go. But if you are willing to take a little bit of a chance, and you can tolerate the fluctuations, then the odds favour the open, variable-rate mortgage.”

Advocating a variable-rate mortgage is not based on a speculative or bearish bet on interest rates, he says.

“It should depend on a client’s tolerance for risk — the same concept used in traditional asset allocation — and their ability to withstand increases in mortgage payments.”

In the worst-case scenario, soaring interest rates could mean having to cough up an extra couple of hundred dollars a month.

But this would be balanced by the fact that in previous months the mortgage expenditure was less.

Despite studies which show that those with a variable-rate mortgage come out ahead, Milevsky is reluctant to recommend one option over the other when it’s not his money at stake.

He is sure of only one thing. He has an open variable-rate mortgage and has no intention of locking it in.

© The Vancouver Province 2008

Doors open to homebuyers

Keith Woolhouse
Province

House hunting this spring? You’ve never had it so good. Interest rates are heading down and choices abound on the mortgage front, with new lenders competing with the banks and brokers for your business.

The range of options has seldom been so great. Those determined to get the mortgage paid down as fast as possible have a slew of choices to accelerate their payments. Those who want to take the slow-and- steady route can amortize their repayments over 40 years, an option that didn’t exist until 18 months ago.

Residential-mortgage credit is growing by leaps and bounds. It is now a $77-billion-a-year industry. Canadians currently have $800 billion invested in mortgage credit and it is forecast to grow by 11.7 per cent this year and surpass $1 trillion in 2010.

Jim Murphy, president and CEO of the Canadian Association of Accredited Mortgage Professionals, which has 11,500 members, says the industry’s “enormous growth” is a reflection of Canadians’ desire to own their own homes, but also the relaxation of regulations and arrival of new companies with new products, all of which has benefitted buyers. A decent economy, good employment numbers and historically low interest rates haven’t hurt either, he points out.

“The mortgage industry in Canada over the past 10 to 15 years has matured and grown enormously. Fifteen years ago the mortgage brokers had about five per cent of the market. Today they have around 30 per cent. We’ve seen the arrival of new lenders like trust companies and mortgage banks like First National, MCPA and Maple Trust, all of them working through the brokerage channel.

“We have not only more lenders, but also more insurers. It used to be just [Canada Mortgage and Housing Corp.] issuing mortgage insurance needed by buyers putting down less than 20 per cent of the price of the home, but then GM Capital, now Genworth Financial, a private mortgage insurance provider, arrived and they’ve been followed by a number of others.

“There’s a lot more of everything. More lenders, more insurers, more brokers and more options for consumers in terms of mortgage product.”

One of the biggest changes was extending the amortization period to 40 years from 25. That raised the bar on affordability and opened the door to thousands of buyers, a move Murphy heartily endorsed.

“Last year, of all mortgages taken out in Canada, 37 per cent had an amortization longer than 25 years. That’s been a tremendously successful product and it really speaks to affordability. In some of the larger urban centres, average home prices are more than a quarter of a million dollars, and to put down 20 per cent — $50,000 — is a lot for a first- time buyer, who may have university costs, debts and other financial responsibilities.

“Critics will say that you pay more in interest, but on the other hand your upfront costs are less and you’re in the market sooner and everybody deserves that. Consumers have really taken advantage of that opportunity.”

Another significant influence has been the Internet.

It is possible to apply online for a mortgage, but not many are using that feature, says Joan Dal Bianco, vice-president of real-estate secured lending at TD Canada Trust in Toronto.

But most buyers are turning to the Internet to find out how much they can afford for a home and to use the online calculators to work out repayment costs.

“They basically know when they come into the bank what they can afford to pay, and that’s when they sign up for a pre-approved mortgage and go house hunting.”

The pre-approved mortgage locks in a rate for 120 days and is a win-win situation for a buyer. If the rate goes down during the lock-in period, the lower rate applies.

If the rate goes up, the locked-in rate applies. Dal Bianco urges everyone, “even those just contemplating getting into the property market to get pre-approval. It doesn’t cost anything, you’ve got nothing to lose and everything to gain.”

Pay weekly, bi-monthly or monthly, if you so choose. Put the mortgage term over three years or five. Spread the amortization period over 20 years or 40. Take a fixed-rate mortgage or a floating rate or a mix of the two. Make the mortgage closed or open. The choice is yours.

“It depends on an individual’s comfort zone,” says Dal Bianco. “Buying a home is an extremely emotional event and, from what our clients have told us, it ranks with marriage and childbirth. The worst thing that can happen is that you find a house that you fall in love with — and this often happens — and then discover that you can’t afford it because you don’t have enough down payment or you haven’t made sure in advance that it is something you can comfortably afford.

“So do your homework.”

© The Vancouver Province 2008